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Who keeps the earnest money if the home sale falls through?

On Behalf of | Feb 7, 2024 | Real Estate Contract Disputes

First, let us clarify what we mean by earnest money in the context of a home sale. Earnest money is a deposit that serves as a good-faith gesture from the buyer to the seller. It acts as a buyer’s commitment to purchase a home. Typically held in an escrow account, this deposit is an integral part of the agreement between buyer and seller.

However, the future of the deposit can become a contentious issue should the deal go awry. You see, the buyer or seller may have a right to get it depending on the terms of their purchase agreement.

The role of the purchase agreement in real estate transactions

No one enters a real estate transaction expecting it to fail. But should the unexpected occur, it is crucial to know where you stand. The disposition of your earnest money hinges on the specific terms outlined in your purchase agreement. Therefore, regardless of whether you are the buyer or seller, you must carefully understand the terms and conditions of your contracts before signing it.

The purchase agreement allows the buyer and seller to outline their expectations from the transaction and their obligations to it. The earnest money provides both parties with protection. The deposit signals the buyer’s serious intent to purchase the property, distinguishing them from less serious prospects. Should the seller fail to uphold their end of the deal or breach the contract, the buyer may reclaim their deposit.

The deposit also acts as a form of insurance for the seller. If the buyer decides to walk away from the deal without meeting the contract’s contingencies, the seller often has the right to claim the deposit. In this case, the seller retains the deposit to cover some of the losses incurred, such as time off the market or missed opportunities with other potential buyers.

Earnest money is an incentive to go through with the sale

The deposit is a tangible commitment from the buyer to complete the purchase as long as the seller fulfills their obligations to the purchase agreement. For the seller, it provides a level of monetary security and reassurance that the buyer is earnest in their intention to buy. It is a crucial element that balances the scales, ensuring both parties have a stake in the transaction’s successful conclusion.